Increase in VAT on energy saving products postponed

Amendments to the 2016 budget have removed controversial increases in the rate at which a variety of energy saving measures including solar panel installation are taxed [1, 2].

A variety of energy saving measures have long benefited from lower rates of VAT, being taxed at five percent, rather than the usual twenty percent. These low rates were instituted as part of an EU policy which allows exemptions for the "provision, construction, renovation and alteration of housing as part of social policy" [3].

However the EU commission felt that the UK’s provisions were too wide ranging. The lower rate was not just for those who were considered to be socially vulnerable. Furthermore some systems with the exemption, such as solar panels, go beyond the “renovation” of the building. Electricity generation is not a change to the fabric of a building, but rather adds a new capability to it. In June of 2015 the European Court of Justice ruled that the UK’s current VAT rates for some domestic renewable energy installations were illegal [4].

A consultation document released in December of 2015 outlines the planned changes. This could see the cost of installing renewable energy generation increase dramatically. Coupled with reductions in the feed in tariff this has led to substantial concern both within the renewables industry and among those considering installing solar panels.

However a change to the VAT rates for energy saving measures has not made it into the budget of March 2016 [5]. Labour MP’s proposed an amendment to the controversial changes and this was backed by a large number of MPs from across the political parties. Notably a large number of conservative rebels opposed to Britain’s membership in the European Union sided with the opposition parties to block the planned changes [6].

Britain is seeking to renegotiate the EU directives that set VAT rates. The EU commission are re-examining their policy and considering relaxing their control and allowing member states greater latitude in setting VAT rates [7]. Changes to UK laws have been postponed until after the EU reaches its decision, and after the controversial referendum into the UK’s membership of the EU.

Encouraging the adoption of renewable energy is an important step towards meeting Britain’s obligations to counter climate change, and is supported by the EU’s energy and environment commissions. It is hoped that changes to EU policy will allow the UK to continue to support the installation of energy saving measures.